Info + Advice for Indies

Simple, Accurate Info + Advice

Is it a deductible business expense?

Daddy's accountant forgot to explain this to you.

Common sense – you know, that’s the commodity your mother wished you had – would tell you that business expenses are the costs you incur to run your business – the money you must spend in order to make money.

The IRS explains it this way:
“To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is appropriate and helpful for your business. An expense does not have to be indispensable to be considered necessary.”

Okay, but what is ordinary to an astrologer? What is necessary to a computer games inventor?

The answer: anything you do that relates to your work, that stimulates or enhances your business, nurtures your professional creativity, improves your skills, wins you recognition, or increases your chances of making a sale is a possible business expense and therefore deductible.

When Anouk Astrologer goes to another astrologer for a reading, that isn’t a personal expense; that’s a business expense, and deductible. It’s just as legitimate a deduction as the cost of a “Learn to Motivate Employees by Role Playing” seminar attended by a salaried middle management executive.

Ivan Inventor – of computer games, that is – shouldn’t assume that buying someone else’s computer game can’t be a business expense. Even if he stayed up half the night fighting invaders from another galaxy, he was researching the competition. The purchase of the game is a business deduction.

You are self-employed – so from this moment on, whenever you reach into your pocket for money, write a check, or slip out your credit card, be aware that you may be engaging in a business transaction. Change your brain circuits to accommodate your new mindset.

New mindset in place? Good. Now turn on your brain – the fertile brain of an indie – and take a fresh look at these three aspects of your career.

First: Define your business as broadly as you honestly can. The more multi-faceted and inclusive your field of endeavor the more wide-ranging your expenses and thereby the less taxes you’ll end up paying!

A photojournalist can deduct a more extensive variety of expenses than can a wedding photographer.

A technological consultant’s expenses will be more diverse than those of a computer repair person.

A generalist writer – someone who might write about anything – has more assorted expenses than a sports writer.

Second: Look at your activities. Don’t be so sure that there is a well-marked difference between work and family and play and chores, or that you know what the difference is.

The business life of an employee is rather sharply defined, but the business life of a self-employed like yourself is intertwined with your personal life. If your business is broadly defined and your life is richly complicated, it can make for an intertwining that gets pretty tangled. If you’re caring for your parents while running a day care business, or are dropping off several of your children at different locations while delivering products to clients, or struggling to find time for your new independent venture while holding down a full-time job, the interplay of your business and other interests can be intricate. On the other hand, if you’re a loner, without commitments or obligations, the boundary between business life and personal life might be remarkably simple.

A musician who is single and without children may do very little that is not considered ordinary and necessary to his business – travel, purchase entertainment system equipment and CDs, download MP3s, attend concerts.

An alarm-system installer with 4 children who spends all his free time going fishing, by himself, is going to have limited business expenses.

A visual artist attends a Broadway performance and scrutinizes the sets and costumes. She deducts the cost of the ticket as a business study expense.

A structural engineer drives through Millionaire’s Mile looking at the period architecture of the houses and writes up his notes when back at his home office. Since this is research for him the drive is a business event and the mileage there and back is a business expense.

The proprietor of a hand-made clothes for children shop deducts as a publication expense every magazine she purchases that has any clothing, kids, or fabric industry trends in it.

Third: Review your relationship to the people you spend your time with. Your new mindset expands the way you think about the link between what you do and the people you do it with. Anyone who has a connection with your business may be primarily a business associate even though in some cases he or she may also happen to be a college classmate, friend, parent, child, or spouse. Friendship with a business associate is not necessarily fatal to a deduction. You’ll just have to show that the predominant motive for the activity that warranted the expense was business-related.

A dance instructor calls his friend to invite her to a movie and, also, to ask her to bring her notes from the marketing webinar she attended. He wants to look at them for ideas on promoting his business. He deducts the business phone call and also dinner afterward for both of them because over dinner she expanded on her notes from the webinar.

A carpenter deducts not only the tools that she buys, but also the expense of dining out. Why? Because during the meal with her husband she talks about her new business, gets his advice on questions of scheduling, picks his brain about various proposals, and tests his reaction to her brochure. She could not have had this business discussion at the family dinner table with her three children in attendance and so the gift given to her brother as thanks for baby-sitting while she was at this dinner is also a business expense.

To sum up, when looking for the best possible advantage regarding business expenses:

Define your business as broadly as possible.

Remember your business expenses may be expanded or limited by the scope of your business, the money available to spend on your business and the time available due to other commitments.

Whatever you do, and whomever you do it with, consider the possibility of a business connection.

For a free download, click here Quicken Categories Adapted For The Self-Employed.

2 Responses to “Is it a deductible business expense?”

I’m taking a beginning course in Spanish. I am beginning to get clients (I’m a lawyer) who are Spanish speaking as their primary language. I’d like to cultivate this demographic and I think having a basic understanding of the language would help me in that regard. It’s the only reason I’m taking the course, and future courses. I’ve read IRC Sect. 162 and some other commentators, but I’m still not sure if the books and tuition would be deductible as business expenses. Also, I don’t want to raise any red flags with the IRS. I’m not doing anything wrong, I just don’t need the hassle of an audit. Any comments would be appreciated.

A few points:
You are already in the profession.
You want to expand your client base or better serve those clients who are Spanish speaking.
You are NOT seeking a degree in Language Studies.
You are NOT planning a summer vacation in Spain and want to enjoy it by being bilingual.

I purchased a couple of books re: self employment taxes. I like yours (Self-employed Tax Solutions) because it’s written in plain language. The JK Lasser book (Small Business Taxes) appears to be writ…Linda Gordon

I recently bought your book, and wanted to tell you what you already know – it’s terrific. So many great common-sense features. In addition to my “indie” business, I’ve also been a tax preparer for an…James M. Beidler

I really enjoyed reading your book. So many other [tax books] were too technical, very lengthy and downright boring. You injected your sense of humor and put everything in layman’s terms. I refer to y…Ephraim Schum

I read Self-employed Tax Solutions from cover to cover in about 3 days (I finished it today), and found it engaging and well written. That’s high praise for a book on taxes. I’ve read other tax books ……Paul Plamondon

I just purchased your book Self Employed Tax Solutions, and let me start by saying this is the first time I have written an email to an author. I’m only in the third chapter and am so happy about the …Dean Iodice